Euro Forward Pressure

Short-term European interest rates and euro forward rates are under modest pressure and will likely remain under pressure over the next few sessions.

Next Tuesday, the ECB will auction 1 year money and there is market talk that European banks and banks with branches in the eurozone are eager to secure the longer term funding. This demand appears to be already making itself evident and this technical consideration is pressuring short-term interest rates lower. There is talk that next week's tender will be heavily over-subscribed.

EONIA--(the euro overnight index average) is quoted near 0.8520% vs the 1% refi rate as is the one month Euribor (fixed at 0.948% today). The risk is that EONIA continues to slip in the coming days. The 0.25% deposit rate represents the floor for rates.

Remember that it is not just eurozone banks that have access to the ECB's facilities, but also branches of foreign banks operating in the eurozone as well. It is reasonable, it seems, to expect that some of the liquidity that the ECB makes available "leaks" out of the region as the branches shift some of funds secured that may be secured in the tender.

US rates at the moment appear more stable than Europe's, so the euro forward points may be driven more by European rate developments. Holding everything else constant, which of course is never the case, what is being discussed here, is, if anything, euro negative. The negativity arises from lower money market rates and the possible shifting of funds from the eurozone to other areas.

As it so happens there is a FOMC meeting next week as well. It concludes on Wed, after the ECB's allotment of its tender is announced. While no change in US rates is expected, there is some speculation that the Fed may announce an increase in Treasury purchases and/or make a stronger statement about rates being kept on hold for a prolonged period of time--perhaps some suggest citing a timeframe, as other central banks have done, like not hike before H2 2010.